Chapter One

1. Accounting Information Systems: An Overview

After studying this chapter, you should be able to:
Distinguish data from information
Discuss the characteristics of useful information, and explain how to determine the
value of information.
Explain the decisions an organization makes, the information needed to make them,
and the major business processes present in most companies.
Explain how an AIS adds value to an organization
Explain AIS’s role in a value chain.
1.1. An Overview of Accounting Information Systems.
A system is a set of two or more interrelated components, with a clearly defined boundary,
working together to achieve common set of objectives or goals. Most systems are composed
of smaller subsystems that support the larger system. For example, a college of business is a
system composed of various departments, each of which is a subsystem. Moreover, the
college itself is a subsystem of the university. Each subsystem is designed to achieve one or
more organizational goals. Changes in subsystems cannot be made without considering the
effect on other subsystems and on the system as a whole.
Goal conflict occurs when a subsystem’s goals are inconsistent with the goals of another
subsystem or with the system as a whole.
Goal congruence occurs when a subsystem achieves its goals while contributing to the
organization’s overall goal. The larger the organization and the more complicated the system,
the more difficult it is to achieve goal congruence.
Data are facts that are collected, recorded, stored, and processed by an information system.
Businesses need to collect several kinds of data, such as the activities that take place, the
resources affected by the activities, and the people who participate in the activity. For
example, the business needs to collect data about a sale (date, total amount), the resource sold
(good or service, quantity sold, unit price), and the people who participated (customer,
salesperson). Information is data that have been organized and processed to provide
meaning and improve the decision-making process. As a rule, users make better decisions as
the quantity and quality of information increase.
However, there are limits to the amount of information the human mind can absorb and
process.
Information overload occurs when those limits are passed, resulting in a decline in decision-
making quality and an increase in the cost of providing that information. Information system
designers use information technology (IT) to help decision makers more effectively filter
and condense information.

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The value of information is the benefit produced by the information minus the cost of
producing it. Benefits of information include reduced uncertainty, improved decisions, and
improved ability to plan and schedule activities. The costs include the time and resources
spent to produce and distribute the information. Information costs and benefits can be
difficult to quantify, and it is difficult to determine the value of information before it has been
produced and utilized. Nevertheless, the expected value of information should be calculated
as effectively as possible so that the costs of producing the information do not exceed its
benefits.
Do you think an organization will gather information through incurring great cost and
getting no value?
 No, unless they are required by law or it is mandatory information
 E.g. VAT Declaration, Withholding Tax Declarations.
Characteristics of useful information
Relevant - Reduces uncertainty, improves decision making, or confirms or corrects prior
expectations.
Reliable -Free from error or bias; accurately represents organization events or activities.
Complete - Does not omit important aspects of the events or activities it measures.
Timely- Provided in time for decision makers to make decisions.
Understandable- Presented in a useful and intelligible format.
Verifiable- Two independent, knowledgeable people produce the same information.
Accessible- Available to users when they need it and in a format they can us
Information System /IS/
An information system (IS) can be any organized combination of
o People,
o Hardware /physical devices/
o Software /Information processing instructions and procedures/ that stores, retrieves, transforms,
and disseminates information in
o Communications networks /channels/ an organization.
o Data resources, and
o Policies and procedures
Information systems use computers (networked or individual) and other involve no use of
computers. Examples of information systems
 A card catalogs in a library (computer based or manual), which are designed to store
data about the books in an organized manner that allows readers to locate a particular
book by its title, author name, subject, or a variety of other approaches.

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  Your book bag, day plans, notebooks, and file folders are all part of an information
system designed to help you organize the inputs provided to you via handouts,
lectures, presentations, and discussions. They also help you process these inputs into
useful outputs: homework and good exam grades.
 A paper-based accounting ledger: Businesses used this type of system for centuries to
record the daily transactions and to keep a record of the balances in their various
business and customer accounts.
Assignment 1: Summarize trends in an information system with brief discussion?
Types of Information Systems
The applications of information systems that are implemented in today’s business world can
be classified in several different ways. For example, several types of information systems can
be classified as either operations or management information systems.
IS types can be summarized using the following diagram

1. Operations Support System: information systems which support the daily operation of a
business.
A. Transaction processing systems: record and process data resulting from business
transactions, update operational databases, and produce business documents. Examples:
sales and inventory processing and accounting systems.
B. Process control systems: Monitor and control industrial processes. Examples: petroleum
refining, power generation, and steel production systems.
C. Enterprise collaboration systems: Support team, workgroup, and enterprise
communications and collaborations. Examples: e-mail, chat, and videoconferencing
groupware systems.

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2. Management Support Systems: information system which focus on providing information
and support for effective decision making by managers. Major types of information systems
which support a variety of decision-making responsibilities are
A. Management information systems. Provide information in the form of prespecified
reports and displays to support business decision making. Examples: sales analysis,
production performance, and cost trend reporting systems.
B. Decision support systems. Provide interactive ad hoc support for the decision-making
processes of managers and other business professionals. Examples: product pricing,
profitability forecasting, and risk analysis systems.
C. Executive information systems. Provide critical information from MIS, DSS, and other
sources tailored to the information needs of executives or top-level managers. Examples:
systems for easy access to analyses of business performance, actions of competitors, and
economic developments to support strategic planning.

Accounting Information System/AIS/ & its Scope

It has often been said that accounting is the language of business. If that is the case, thenan
accounting information system (AIS) is the intelligence—the information-providing vehicle
— of that language. Accounting is a data identification, collection, and storage process as
well as an information development, measurement, and communication process. By
definition, accounting is an information system, since an AIS collects, records, stores, and
processes accounting and other data to produce information for decision makers.
AIS can be a paper-and-pencil manual system, a complex system using the latest in
information technology1, or something in between. Regardless of the approach taken, the
process is the same. The AIS must collect, enter, process, store, and report data and
information. The paper and pencil or the computer hardware and software are merely the
tools used to produce the information.
AIS Processes Data to Produce Information for Decision Makers

There are six components of AIS:

1. The people who use the system
2. The procedures and instructions used to collect, process, and store data
3. The data about the organization and its business activities
4. The software used to process the data
5. The information technology infrastructure, including the computers, peripheral devices,
and network communications devices used in the AIS

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Technology is simply a tool to create, maintain, or improve a system.

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6. The internal controls and security measures that safeguard AIS data
These six components enable AIS to fulfill three important business functions:
1. Collect and store data about organizational activities, resources, and personnel.
Organizations have a number of business processes, such as making a sale or purchasing
raw materials, which are repeated frequently.
2. Transform data into information so management can plan, execute, control, and evaluate
activities, resources, and personnel.
3. Provide adequate controls to safeguard the organization’s assets and data.
Since accounting data comes from AIS, AIS knowledge and skills are critical to an
accountant’s career success. Interacting with AIS is one of the most important activities that
accountants perform. Other important AIS-related activities include designing information
systems and business process improvements.
Moreover, an effective AIS is essential to the organization’s long run success.
 It enables monitoring the events that occurs and how well an organization works.
 It also tracks the effect of various events on the resources that the organization controls.
 Information about the agents who participate in the events is used to assign
responsibility for actions taken.

How AIS Can Add Value to an Organization

A Well-designed AIS can add value to an organization by:
1. Improving the quality and reducing the costs of products or services. For example, AIS
can monitor machinery so operators are notified immediately when performance falls outside
acceptable quality limits. This helps maintain product quality, reduces waste, and lowers
costs.
2. Improving efficiency. For example, timely information makes a just-in-time
manufacturing approach possible, as it requires constant, accurate, up-to-date information
about raw materials inventories and their locations.
3. Sharing knowledge. Sharing knowledge and expertise can improve operations and provide
a competitive advantage. For example, CPA firms use their information systems to share best
practices and to support communication between offices. Employees can search the corporate
database to identify experts to provide assistance for a particular client; thus, a CPA firm’s
international expertise can be made available to any local client.
4. Improving the efficiency and effectiveness of its supply chain. For example, allowing
customers to directly access inventory and sales order entry systems can reduce sales and
marketing costs, thereby increasing customer retention rates.
5 Improving the internal control structure. An AIS with the proper internal control structure
can help protect systems from fraud, errors, system failures, and disasters.

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6. Improving decision making. Improved decision making is vitally important and is
discussed below in more detail.
Decision making is a complex, multistep activity: identify the problem, collect and interpret
information, evaluate ways to solve the problem, select a solution methodology, and
implement the solution. An AIS can provide assistance in all phases of decision making.
Reports can help to identify potential problems. Decision models and analytical tools can be
provided to users. Query languages can gather relevant data to help make the decision.
Various tools, such as graphical interfaces, can help the decision maker interpret decision
model results, evaluate them, and choose among alternative courses of action. In addition, the
AIS can provide feedback on the results of actions. AIS can help improve decision making in
several ways:
It can identify situations requiring management action. For example, a cost report with a large
variance might stimulate management to investigate and, if necessary, take corrective action.
It can reduce uncertainty and thereby provide a basis for choosing among alternative actions.
It can store information about the results of previous decisions, which provides valuable
feedback that can be used to improve future decisions. For example, if a company tries a
particular marketing strategy and the information gathered indicates that it did not succeed,
the company can use that information to select a different marketing strategy.
It can provide accurate information in a timely manner. For example, Walmart has an
enormous database that contains detailed information about sales transactions at each of its
stores. It uses this information to optimize the amount of each product carried at each store.
It can analyze sales data to discover items that are purchased together, and it can use such
information to improve the layout of merchandise or to encourage additional sales of related
items. For example, Amazon uses its sales database to suggest additional books for customers
to purchase.
Business Processes/Activities/Decisions/ and Information Needs
All organizations need information in order to make effective decisions. In addition, all
organizations have certain business processes in which they are continuously engaged. A
business process is a set of related, coordinated, and structured activities and tasks that are
performed by a person, a computer, or a machine, and that help accomplish a specific
organizational goal. To make effective decisions, organizations must decide what decisions
they need to make, what information they need to make the decisions, and how to gather and
process the data needed to produce the information. This data gathering and processing is
often tied to the basic business processes in an organization.
Information Needs

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To explain more about information needs for organizations let us consider an illustration for
Samsung Electronics decide they must understand how Samsung Electronics functions before
they can identify the information they need to manage Samsung Electronics effectively. Then
they can determine the types of data and procedures they will need to collect and produce that
information. They created the following Table to summarize part of their analysis. It lists
Samsung Electronics’ basic business processes, some key decisions that need to be made for
each process, and information they need to make the decisions. Samsung Electronics realize
that the list is not exhaustive, but they are satisfied that it provides a good overview of
Samsung Electronics. They also recognize that not all the information needs listed in the
right-hand column will be produced internally by Samsung Electronics. Information about
payment terms for merchandise purchases, for example, will be provided by vendors. Thus,
Samsung Electronics must effectively integrate external data with internally generated data so
that Samsung Electronics can use both types of information to run Samsung Electronics.
Samsung Electronics will interact with many external parties, such as customers, vendors,
and governmental agencies, as well as with internal parties such as management and
employees. The following table shows Business Processes, Key Decisions, and Information
Needs for Samsung Electronics.
Table 1.1 overview of Samsung Electronics’ Business Processes, Key Decisions, and
Information Needs

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Business Processes
Many organizations reorganize their business processes listed into groups of related
transactions. A transaction is an agreement between two entities to exchange goods or
services or any other event that can be measured in economic terms by an organization.
Examples include selling goods to customers, buying inventory from suppliers, and paying
employees.
The process that begins with capturing transaction data and ends with informational output,
such as the financial statements, is called transaction processing. Many business activities
are pairs of events involved in a give-get exchange. Most organizations engage in a small
number of give-get exchanges, but each type of exchange happens many times. These
exchanges can be grouped into five major business processes or transaction cycles:
1. The revenue cycle, where goods and services are sold for cash or a future promise to
receive cash
2. The expenditure cycle, where companies purchase inventory for resale or raw materials
to use in producing products in exchange for cash or a future promise to pay cash.
3. The production or conversion cycle, where raw materials are transformed into finished
goods.
4. The human resources/payroll cycle, where employees are hired, trained, compensated,
evaluated, promoted, and terminated.
5. The financing cycle, where companies sell shares in the company to investors and
borrow money, and where investors are paid dividends and interest is paid on loans.
These cycles process a few related transactions repeatedly. For example, most revenue cycle
transactions are either selling goods or services to customers or collecting cash for those
sales. Figure below shows the main transaction cycles and the give-get exchange inherent in
each cycle. These basic give-get exchanges are supported by a number of other business
activities.
For example, S&S may need to answer a number of customer inquiries and check inventory
levels before it can make a sale. Likewise, it may have to check customer credit before a
credit sale is made. Accounts receivable will have to be increased each time a credit sale is
made and decreased each time a customer payment is received.
Notice that the last activity for each transaction cycle is “Send appropriate information to the
other cycles.” how these various transaction cycles relate to one another and interface with
the general ledger and reporting system, which is used to generate information for both
management and external parties.

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The AIS and its subsystems

Activity 2
How AIS course differs from other accounting courses? What is the importance of knowing
this course?
The Role of the AIS in the Value Chain
The objective of most organization is to provide value to their customers. This requires
performing a number of different activities. These activities are conceptualized as forming a
value chain. An organization’s value chain consists of primary and support activities.
Primary activities are those that directly provide value to its customers & includes:

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1. Inbound logistics: consists of receiving, storing, and distributing the materials an
organization uses to create the services and products it sells. For example, an automobile
manufacturer receives handles, and stores steel, glass, and rubber.
2. Operations activities transform inputs into final products or services. For example,
assembly line activities convert raw materials into a finished car and retailers remove
goods from packing boxes and place the individual items on shelves for customers to
purchase.
3. Outbound logistics activities distribute finished products or services to customers. An
example is shipping automobiles to car dealers.
4. Marketing and sales activities help customers buy the organization’s products or
services. Advertising is an example of a marketing and sales activity.
5. Service activities provide post-sale support to customers. Examples include repair and
maintenance services.
Support activities allow the five primary activities to be performed efficiently and
effectively.
They are grouped into four categories:
1. Firm infrastructure is the accounting, finance, legal, and general administration
activities that allow an organization to function. The AIS is part of the firm
infrastructure.
2. Human resources activities include recruiting, hiring, training, and compensating
employees.
3. Technology activities improve a product or service. Examples include research and
development, investments in IT, and product design.
4. Purchasing activities procure raw materials, supplies, machinery, and the buildings
used to carry out the primary activities.
It shall be recalled that systems are often composed of subsystems. Thus, each step in an
organization’s value chain in itself is a system consisting of a set of activities. For example,

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the sales and marketing step includes such activities as market research, calling on customers,
order processing, and credit approval.
In addition, an organization’s value chain is itself a part of a large system, called value chain.
For instance: A manufacturing organization interacts with its suppliers and distributors,
which collectively creates a supply chain.
By paying attention to its supply chain, a company can improve its performance by helping
the others in the supply chain to improve their performance. Moreover, the use of information
technology (IT) to redesign supply chain systems may yields tremendous benefits and cost
savings.

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